Predictive Regressions: A Present‐Value Approach

ABSTRACT

We propose a latent variables approach within a present‐value model to estimate the expected returns and expected dividend
growth rates of the aggregate stock market. This approach aggregates information contained in the history of price‐dividend
ratios and dividend growth rates to predict future returns and dividend growth rates. We find that returns and dividend growth
rates are predictable with values ranging from 8.2% to 8.9% for returns and 13.9% to 31.6% for dividend growth rates. Both expected returns and expected
dividend growth rates have a persistent component, but expected returns are more persistent than expected dividend growth
rates.